2010 08 10

Two major news today:

1. Weak Chinese imports signaling that government measures to slow down economy might be curbing demand.
2. US Fed announcement to keep loose monetary policy and continue with QE.


Additional news of QE was not bullish for the market with stocks and commodities selling off (despite USD weakening) and yields falling even further.


My thoughts:
1. Manufacturing which has been the engine of economic recovery everywhere in the world is losing momentum and will continue to weaken.
2. Economy is pretty weak in US, Europe, UK and Japan. The signs of weakness will become more obvious in the coming month or two. When that happens US will rally relative to the others especially in currency
3. I think US job market is not as bad as people think. But hiring will take time as businesses wait to see what policy changes will be implemented.
4. China is a big unknown. My view is that we will see another month or two of data that would show slowdown, and at that point the government might show some easing in their policy. However, I cannot yet guess what that would to global asset markets. I assume particularly positive for commodities and also equities.
5. I think US 10yr yield will stay below 3% for the remainder of the year.
6. I think gold is the best bet for the remainder of the year.


US Fed embarks on quantitative easing
• The Fed expressed slightly more cautious outlook on US economy and basically no change in their intention to keep rates extraordinarily low for extended time.
• The fed announced greater injection of money into economy. They’ll do so by : back in 2009 they bought tons of mortgage backed securities to support the credit market. As these debts come to mature the Fed would simply take the proceeds and go buy some other debts. This is what they mean by maintaining balance sheet.

UK Retail Sales slowed markedly in July. Housing price data also disappoints
• UK BRC Retail Sales monitor printed at 0.5% in July versus 1.2% in June. The rate of growth in retail sales was less than half of the month prior. Sales of food and clothing increased, but sales of durable goods such as furniture declined sharply.
• Today's data suggests that the UK consumer remains cautious and unwilling to make large discretionary purchases for the household. The news also dovetails with today's poor RICS house price balance data which came in at -8% versus 5% expected. As demand for UK housing begins to decline again the drop off in durable goods purchases is likely to continue for the rest of the year depressing retail sales and GDP growth.
• given the austerity measures facing the UK economy in the second half of the year, growth will be much more challenging than the market believes, making any rally in GBP highly suspect.

French manufacturing drops
• France’s economic recovery appears to be flagging after industrial production plunged in June, in stark contrast to a resurgent Germany.
• Industrial output fell by 1.7 per cent, according to figures published on Tuesday by Insee, the national statistical agency. The decline was much larger than analysts expected, and wipes out most of May’s strong increase, which was revised up to 1.9 per cent.
• The fall in French auto industry output, down 7.4 per cent in June, was the main contributing factor. “The phasing out of the car scrappage scheme is clearly taking its toll,” said Gilles Moec, economist at Deutsche Bank.

US productivity falls – good news for unemployment bad for corporate profits
• The 0.9% quarterly annualised decline in second-quarter US non-farm productivity suggests that firms are finding it harder to squeeze any additional efficiency gains out of their existing workforces.
• This a positive for job market looking ahead and probably also serves as a deflation fighter. BUT this is a big negative for corporate earnings which has been boosted by cost cutting (layoffs).

China trade surplus goes even higher but that’s due to slowing imports which isn’t necessarily a great sign
• China’s trade surplus surged again in July to its highest level in 18 months
• The data reflected a continued strong increase in exports, which rose 38.1 per cent year on year. At the same time, the pace of growth in imports slowed sharply from a 34.1 per cent year-on-year increase in June to a 22.7 per cent increase in July. This represented a seasonally adjusted drop of 5.6 per cent from the previous month, according to BarCap, as slowing domestic investment cooled Chinese demand for imports.
• Basically, it does seem like the effort to cool down economy is having a noticeable impact on domestic demand.